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Operational Risk

Operational risk refers to the potential for losses resulting from inadequate or failed internal processes, people, systems, or external events. This risk includes a wide range of issues, such as fraud, human error, system failures, or disruptions caused by external factors like natural disasters or cyberattacks. Managing operational risk is crucial for maintaining business continuity and protecting a company’s assets and reputation.

Example

A bank faces operational risk when a software glitch causes a system failure, preventing transactions from being processed and resulting in financial and reputational losses.

Key points

• The risk of loss due to inadequate or failed processes, people, systems, or external events.

• Includes risks from human error, system failures, and external disruptions.

• Managing operational risk is critical for business continuity and safeguarding assets.

Quick Answers to Curious Questions

Key components include internal processes, human factors, technology systems, and external events like natural disasters or cyberattacks.

Companies can mitigate operational risk through robust risk management practices, including internal controls, employee training, and disaster recovery plans.

It helps protect against potential losses, maintain business continuity, and safeguard the institution's reputation.